Monday, September 05, 2022

China's real estate dilemma

China's real estate sector is becoming a mess. Building companies are going broke, prices are falling and people have started a mortgage boycot on unfinished projects. Some people are already predicting a similar mess as in Japan that after a real estate boom had two "lost decades" without economic growth. It depends on how the Chinese government reacts. In an economic crisis the cause is always some unbalance. Good crisis management solves that unbalance without creating other unbalances. It was here that Japan went wrong. Rather than solving the problem it froze the situation in order to unfreeze it very gradually. The result was a lot of zombie companies that were technically broke yet continued functioning. Of course people were very cautious to deal with such companies: if you gave them money - for example as a prepayment - you were never sure if and when you might get your money back or the things you paid for. Even worse, you weren't even sure which companies were zombies so you had to be always careful. It is not hard to understand that such a situation is bad for economic growth. A slightly better reaction could be seen in the reaction to the financial crisis of 2008 in the US and Europe. In this case it was decided to invest lots of government money so that almost no one had to go broke. The fear was that one bankruptcy would result in a chain reaction that caused many other bankruptcies. The problem of this approach was that the underlying problems weren't addressed. When the next bubble bursts there will still be a too closely connected financial sector where one bankruptcy can generate many more. Not to mention that a lot of taxpayer money went to subsidize the financial sector's fat cats. But the main goal was achieved: the crisis was solved very quickly. China has announced that it will prioritize protecting homeowners over developers. That is a good beginning. Japan's big problem was that it didn't have the courage to confront well connected businessmen with huge losses or even bankruptcy. But, as the article mentions, much depends on what the regional authorities will do. It is at that level that ties between government officials and developpers are the strongest. That is not the only problem to solve. Houses under construction need to be finished. Housing prices should remain low enough that enough people can afford one but when they sink too much too many people end with mortgages that are higher than the value of the house. And the government will need to find another engine for the economy once housing can no longer serve that role. Let's see whether Xi can handle this challenge.

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